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Why Social Security COLA Calculations Matter

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Social Security is the cornerstone of retirement savings for 20% of Americans, thus the cost of living adjustment determined yearly by the Social Security Administration has an impact on retirees.

Last week’s announcement of the 2021 COLA of 1.3%, followed by an emergency bill by Reps. Peter DeFazio, D-Ore., and John Larson, D-Conn., that would push the increase to 3%, put the COLA debate front and center, especially with an impending election.

It also highlighted the pandemic issues for the elderly. Eight in 10 people killed by COVID-19 are 65 and older.

The COLA is calculated using the CPI-W, a consumer price index reflecting increases for urban wage earners and clerical workers that is based on a fixed market basket of goods and services. COLAs have surpassed 2% only twice since 2010.

The problem with the measurement, according to Social Security advocacy groups, is it doesn’t reflect reality for seniors, who spend twice as much on health care as the average population, according to the National Committee to Preserve Social Security and Medicare. Those 75 and older spend three times as much.

The CPI-E (E for elderly) uses the same formulas and prices as the CPI-W but puts more weight on expenditures typical of those 62 and older. COLAs using this index would be 0.2 percentage points higher on average, the Social Security Office of Chief Actuary reported in 2011.

A third way to adjust COLAs was brought up by the Obama administration in a budget proposal in 2013 and then dropped due to Democratic backlash, but has again reappeared, this time in a spending bill by Republicans: the so-called chained CPI, or C-CPI-U. This, according to the Chief Actuary’s 2011 estimate, would decrease the annual COLA, on average, by 0.3 percentage points.

The chained CPI is a version of the CPI-U, which measures all urban consumers and is used for the tax code. C-CPI-U takes into account how consumers will switch to less expensive brands or products in case of a price increase.

“For the moment, no one, as far as we know, is proposing the chained CPI, which is even more of an under-measurement for Social Security beneficiaries than current law,” said Nancy Altman, president of the advocacy group Social Security Works, in an email. “Rather, the discussion today focuses on current law vs. the more accurate CPI-E.”

The fact remains that all these measurements especially impact the elderly and most likely nothing will happen before the election. Dan Adcock, director of government affairs and policy for the NCPSSM, told ThinkAdvisor that the 3% increase proposed by House Democrats last week would need a budget resolution and 60 votes in the Senate, which is unlikely to happen.

“It has a better chance in the 117th Congress, if the Democrats take the Senate and take the White House,” Adcock says.

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